UNFI Signs Up Safeway

There’s been so much talk and expectation swirling about the long-rumored Safeway-UNFI supply deal that the actual announcement, when it came this morning, seemed almost anticlimactic.

Certainly, that’s not the feeling at United Natural Foods, which has been negotiating for the Safeway business for months. This is a plum for the company, since Safeway is the largest chain it’s ever handled. It does an estimated $41 billion in business and operates more than 1,700 stores coast to coast.

Up until this point, Whole Foods Market (with roughly 300 stores and $9 billion in sales) has been UNFI’s biggest customer, accounting for about a third of its business. Analysts are not only going to be extremely happy to see UNFI expand its overall volume, but to diversify its business and move away from an overreliance of WFM for income.

UNFI officials expect incremental annual volume from the Safeway contract will increase annual revenues by approximately 4% in fiscal 2012.

Under the terms of the agreement made public, UNFI will assume distribution to all of Safeway's banners in the United States for non-proprietary natural, organic and specialty products effective October 2011. In the meantime, Safeway is terminating the current agreements for natural/organic and specialty distribution with Kehe Food Distributors/Tree of Life and DPI Specialty Foods.

UNFI will have to pony up a bit as well to facilitate the transition. The company is predicting up to $2.5 million in total start-up expenses during the fourth quarter of fiscal 2011 and the first quarter of fiscal 2012 to transition this business.

As large as this account is, however, one has to wonder just how much "non-proprietary" natural/organic/specialty business Safeway is doing compared to 10 years ago, when (pre-merger) Tree of Life had the contract. Today, Safeway has a strong portfiolio of natural/organic and better-for-you store brands that the chain has done a fantastic job of building. One Twitter observer surmises that Tree of Life was partially undone by its relationship with Safeway.

“We are in the process of finalizing a transition plan with Safeway in order to provide them with excellent service levels and support, while ensuring there are no disruptions to any of our existing customers," said Sean Griffin, UNFI’s senior vice president, national distribution.

UNFI operates 13 distribution centers in the U.S. (seven of them in the East) and they are being upgraded and outfitted with voice-pick technology and other advances that will allow it to handle volumes of the kind promised by the Safeway deal. Analysts noted in an earlier profile of the company in our own Supermarket News that UNFI’s challenge during the initial period after integration will be to keep margins up. While conventional distribution is less expensive than natural/organic, the company stands to start feeling pressure as it adds conventional accounts, since margins will be a bit tighter.

UNFI CEO Steven Spinner (who was not available to us for comment) described the distribution industry in the same SN story

as still “very fragmented,” adding that UNFI’s sales account for less than 10% of the larger, $81 billion organic wholesale business, and less than 4% of the $63 billion specialty wholesale channel.

“There’s plenty of room for growth,” he said. And with this new Safeway deal inked, we now get a better idea of what he was talking about.